Tag Archives: subprime

Moody’s Fate in Subprime Probe to Be Decided Soon by U.S.

The U.S. Justice Department will decide in the next few months whether it will sue Moody’s Corp. for allegedly inflating ratings on mortgage bonds at the heart of the 2008 financial meltdown, according to people familiar with the matter.

The multiyear inquiry into Moody’s is among the remaining live investigations into the mortgage lenders, Wall Street banks and ratings firms that the government has sought to hold accountable for the subprime crisis. A year ago, ratings company Standard & Poor’s, a unit of McGraw Hill Financial Inc., paid $1.5 billion to resolve allegations that it had inflated mortgage-bond ratings to gain business during the housing boom.

Any case against Moody’s would be smaller than the one against S&P because the pool of Moody’s-rated securities at issue is smaller, one of the people said.

The government could sue Moody’s, reach a monetary settlement or close its investigation without taking action, according to one of the people familiar with the matter. A decision on how to proceed is probably a few months away, according to the people, who asked to be named because the investigation is confidential.

Read on.

GE gets subpoena over subprime mortgage operation

DOJ investigating whether General Electric broke any laws from 2005 to 2007

The Department of Justice subpoenaed General Electric’s records containing subprime mortgages from GE’s financial services business WMC Mortgage Corp.

On Friday, GE disclosed in its annual report, that its lending unit, GE Capital, and defunct subprime lending unit WMC, received the subpoenas in January.

According to Reuters:

The conglomerate said it learned in December that the department was probing purchase or sale of residential mortgage loans between Jan. 1, 2005 and Dec. 31, 2007.

“We will cooperate with the Justice Department’s investigation, which is at an early stage,” GE said in a filing on Friday.

According to the DOJ’s investigation, currently there are 14 lawsuits relating to pending mortgage loan repurchase claims with WMC.

Read on.

GE Says Justice Department Sent Subpoenas to GE Capital, WMC in Subprime Probe

The Justice Department has subpoenaed records concerning subprime mortgages from General Electric Co.’s financial services business, the company said in a securities filing, the latest indication of the long shadow the subprime boom has cast over lenders.

GE disclosed in its annual report, filed Friday, that its lending unit, GE Capital, and a former subsidiary that made subprime loans, WMC, received the subpoenas in January.

The records were sought in an industrywide Justice Department investigation of subprime mortgages, which is seeking to determine if federal laws were broken in the “origination, purchase or sale of residential mortgages” from 2005 through 2007, the company said. GE said it is cooperating with the investigation.

The Justice Department didn’t immediately respond to a call for comment.

Read on.

Video Surfaces of Hillary Clinton Blaming Homeowners for Financial Crisis

It is up to the voters to decide which Presidential candidate has a better plan to go over Wall Street execs and end the commercial banks from engaging in the investment business and not simply have the same repeated bank offenders to continue to pay a fine and sign a non-prosecution agreement in order to avoid jail time.

USUncut:

According to Hillary Clinton, if you were a victim of the foreclosure crisis, it was probably your fault.

The only problem with that argument is that it’s not even close to factually correct.

Clinton in 2007: Homeowners “should have known they were getting in over their heads”

When Clinton ran for president during her second term as New York’s U.S. Senator, she gave a tepid speech at the NASDAQ headquarters on December 5, 2007 — before the financial crisis reached a boiling point — about reforming Wall Street’s housing loan practices, largely excusing financial criminals for their behavior.

“Now these economic problems are certainly not all Wall Street’s fault – not by a long shot,” Clinton said early in the speech.

Clinton’s NASDAQ address amounted to essentially asking the financiers assembled to take voluntary action or else she would “consider legislation” to stop banks from kicking families out of their homes. But early on in the speech, Clinton placed equal blame for the subprime mortgage crisis on low-income homeowners alongside Wall Street.

“Homebuyers who paid extra fees to avoid documenting their income should have known they were getting in over their heads,” Clinton said.

One YouTube user found video of the statement and put it side-by-side with her claim at the first Democratic debate in which she said she went to Wall Street before the crisis and told them to “cut it out.”

I read a financial book a couple of years ago that discuss the 10 causes of the financial crisis. I posted some of the highlights on my Justice League blog in 2012:

I mentioned Credit Default Swaps are one of the causes of the financial crisis. Of course there are others. First, let’s talk about Securitization.

Securitization sounds like a great deal for anyone such as the banks, investors, and so on. But, the securitization of pools of mortgages into mortgage-backed securities (MBS) allowed banks to transfer risk to investors because banks no longer obliged to hold mortgages. This allowed banks and mortgage companies to originate more loans and make more money. The more money, the more profits for the banks. And securitization started to apply to other products such as car loans, student loans, credit card debt, and so on.

Second, subprime loans or liar loans.

Once securitization came to play, banks came up with other method of increasing their profits: Originate loans quickly and sell them off to the government, Fannie Mae and Freddie Mac, or to giant mortgage companies such as Countrywide, Option One, Washington Mutual, etc. and change the lending standards such as 0% down, no documentation of income or payment histories, etc.

Third, financial institutions that are deemed “Too Big To Fail.”

We now know which banks own the majority of the US economy: Bank of America, JP Morgan Chase, Wells Fargo, Citigroup, and Goldman Sachs. I called them the “Five Families.” These five families according to Dallas Federal Reserve head own 56% of the US economy. Notice that Goldman Sachs was named with the rest of the four banks. Keep in mind that Goldman Sachs is an investment firm. And in 2008, Goldman Sachs as well as Morgan Stanley became a bank holding company. And of course, Litton Loans, a mortgage servicing company, was owned by Goldman Sachs before Goldman sold Litton Loan to Ocwen.

Fourth, derivatives

In December 2000, thanks to the banking lobbyists’ pressure, Senate passed Commodity Futures Modernization Act which allowed the banks and brokerages to create insurance-type products. Yes, we were introduced to insurance-like products called “Credit Default Swaps.” This product, because it was unregulated, allowed traders that worked for banks and insurance companies to place bets on everything including mortgages and even on products that didn’t own. The risker the bet, the higher the return. And thanks to the introduction of subprime loans, subprime loans were the riskiest.  this is what led to demise of Bear Stearns, Lehman Brothers, and AIG.

Fifth,  Residential and Commerical housing bubble

Certainly much of the blame of the residential and commerical housing bubble is Congress that resisted in reforming Freddie and Fannie rather allowing Freddie and Fannie to buy mortgages from lenders, securitized the loans into bonds, and selling those bonds to investors. As far as commerical mortgages, they were sliced up, securitized, and sold to investors  (i.e. state and municipal pension funds, non-profit foundations, etc.)

Sixth, Politicians wanting to stay in office and benefits from the financial crisis

It has been well known of the many ex- lawmakers and who have personal relationships with our current elected officials have fled to the career as a lobbyist. People who check their own former elected officials to see who is now a registered lobbyist as well as their current elected officials to see if he or she has any lobbyist that works in his or her office or writing his or her bills.

Seventh, Deregulation

After the Glass-Steagall Act, which was a bill in the Great Depression that prohibited commerical banks and investment banks merger, which officially ended regulation for the banks, this is why we had products such as “Credit Default Swaps’ to be unregulated and allow banks to hide liabilities and participate in high risk investments.

Eighth, Globalization

When each nation has its own set of rules for regulating and financial transactions of a company and that international company declares bankruptcy, it affects other companies globally and becomes a financial nightmare. Lehman Brothers’ bankruptcy is an example as many banks and investment firms globally sued to get back the billions that was invested in Lehman bonds and derivatives.

Nine, Credit Rating Agencies

The three major financial rating agencies—Moody’s, Standard & Poors, and Fitch are supposed to office non-biased rating on stocks and bonds. Right? Wrong. All three credit rating agencies gave Lehman Brothers bonds an “A” ratings right up to the day Lehman Brothers filed bankruptcy.

Ten, Federal Reserve Chairman Alan Greenspan

Remember Greenspan, the “godfather of the economy” or the man kept interest rates too low for too long that encouraged buyers to purchase homes in a bid-up market and the height of the housing bubble? This is the same Greenspan who opposed tighter regulation on derivatives and subprime mortgages, had faith in free markets to regulate themselves, and endorsed adjustable rate mortgages (ARM) that ending up being bad advice which left homeowners’ mortgages upside down and left holding the bag.

Yes, there are other individuals and entities to blame such as the Securities Exchange Commission, federal regulators, FDIC, Office of Thrift Supervision (OTS), Justice Department, Office of Comptroller of Currency, homeowners who took out those liar loans and knew that they couldn’t afford them, current Federal Reserve Chairman Ben Bernanke (when he took over Greenspan’s job) who never disclosed to the public the discount window loans given to the banks besides the $700 billion dollar taxpayer money to bail them out, Clinton Administration for allowing the deregulation, Bush Administration for escalating the deregulation which eventually crashed the economy, and so on. We can continue to discuss the causes of the global financial crisis. The real question is will we learn from this and will this be repeated again?

 

Three Ads That Summarize The Current State Of The Subprime Housing Market

Subprime has not left. And here are three ads showing how subprime is not only back, it’s as bad as it ever was.

h/t @KGBInvestor

Bank servicers’ subprime loans see higher losses than nonbank servicers

In the top states for home foreclosures, loans serviced by banks experience higher losses than those serviced by nonbank entities, Moody’s Investors Service says in a new report.

Moody’s report compares loss severities on loans serviced by banks and those serviced by nonbanks in Florida, New York and New Jersey over the past 12 months.

These three states account for 42% of all subprime loans in foreclosure in private-label residential mortgage-backed securities and in all three loss severities on bank-serviced loans were found to be more than 10% higher than they were on loans serviced by nonbanks.

“One of the main reasons bank-serviced loans see higher losses than nonbank-serviced loans is that the former usually have longer foreclosure timelines due to regulatory settlements,” says Vice President and Senior Credit Officer William Fricke. “The additional time needed to process foreclosures led banks’ foreclosure inventories to grow, while nonbank servicers did not initially face the same scrutiny, keeping their inventories smaller and their foreclosure timelines shorter.“

Read on.

Chase Mortgage CEO to CNBC: FHA loans same as “subprime lending”

“We’re not in the subprime lending business”

lol! Memo to Chase Mortgage CEO: You were in the subprime business.  Remember the 2008 financial crisis?? You brought Bear Stearns’ mortgage division EMC Mortgage and WAMU. You had no problem lending money to people who couldn’t afford a loan and providing liar loans. 

Recent Federal Student Loans Look A Lot Like Subprime Mortgages

Federal student loans made in recent years resemble the toxic subprime mortgage loans that helped cause the Great Recession, new data show.

Rather than paying down their balances after leaving school, borrowers with recent federal student loans are experiencing an increase in debt as they fail to make enough payments to offset the accumulating interest on their loans.

The situation parallels subprime mortgages before the financial crisis, when lenders gave borrowers loans they couldn’t afford by allowing them to make payments that didn’t actually reduce their balances.

But while borrowers with toxic subprime loans largely defaulted and lost their homes as their lenders recorded losses, borrowers with federal student loans are likely to have their suffering drawn out for years thanks to a stagnant economy in which wages are barely rising, and existing law and Education Department practices that make it nearly impossible for struggling borrowers to discharge their debt in bankruptcy.

Read on.

Liar Loans Redux: They’re Back and Sneaking Into AAA Rated Bonds

  • Homebuyers are taking on debt again without much paperwork
  • Wall Street spreads legal risks through new bond deals

The pitch arrived with an iconic image of the American Dream: a neat house with a white picket fence.

But behind that picture of a $2.95 million home in Manhattan Beach, California, were hints of something darker: liar loans, those toxic mortgages of the subprime era.

Years after the great American housing bust, mortgages akin to the so-called liar loans — which were made without verifying people’s finances — are creeping back into the market. And, like last time, they’re spreading risks far and wide via Wall Street.

Today’s versions bear only passing resemblance to the ones that proliferated in the mid-2000s, and they’re by no means as widespread. Still, they reflect how the business isstarting to join in the frenzy that’s been creating booms in everything from subprime car loans to junk-rated company bonds.

The Manhattan Beach story — how the mortgage on that house was made and subsequently packaged into securities with top-flight credit ratings — recalls a time when borrowers, lenders and investors all misjudged the potential danger.

Read on.

The U.S. foreclosure crisis was not just a subprime event

While I agree that the foreclosure crisis was not caused by subprime event, the article leaves out  that The Financial Crisis Inquiry Commission’s report (you can get it online) on the housing meltdown found most of the blame with risky lending practices by the banks, inflated home values by appraisers, and banks making money from originated fees by bundling and selling off a lot of the risk as MBS mixed with good and bad loans and getting the blessing of an A+ rating by the credit rating agencies.

Each month, the NBER Digest summarizes several recent NBER working papers. These papers have not been peer-reviewed, but are circulated by their authors for comment and discussion. With the NBER’s blessing, Making Sen$e is pleased to begin featuring these summaries regularly on our page.

The following summary was written by the NBER and doesn’t necessarily reflect the views of Making Sen$e. We will tell you, however, what the takeway is: The U.S. foreclosure crisis, so commonly referred to subprime mortgage crisis, was not in fact, just a subprime event. While it began that way, it became a much broader phenomenon and mainly included prime mortgages. The findings suggest that effective regulation cannot just focus on restricting risky subprime contracts.

Read on.